Central banks increase rates with end of tightening in sight.
Central banks increase rates with end of tightening in sight.
The end of aggressive interest rate hikes: Central banks consider their next moves
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Global central banks are cautiously approaching the end of their aggressive interest rate hikes as signs of abating price pressures emerge. While inflation remains high around the world, some major economies have experienced slower cooling than anticipated.
However, the upcoming decisions about whether to pause or continue raising rates are balanced on a knife-edge. Stopping too early could lead to loose financial conditions and reignite inflationary pressures. On the other hand, delaying rate hikes for too long could trigger a credit crunch and a subsequent recession.
In this current cycle, nine developed economies have collectively raised rates by 3,865 basis points (bps), with Japan serving as the holdout dove. Let’s take a closer look at where these central banks stand in terms of the extent to which they have increased rates so far:
| Ranking | Country | Rate Hike (bps) |
|---|---|---|
| 1 | United States | 5,375 |
| 2 | New Zealand | 1,300 |
| 3 | Britain | 1,275 |
| 4 | Canada | 1,275 |
| 5 | Euro Zone | 1,150 |
| 6 | Australia | 800 |
| 7 | Norway | 650 |
| 8 | Sweden | 550 |
| 9 | Switzerland | 2.50 |
| 10 | Japan | 0 |
United States
The Federal Reserve, having recently increased rates by 25 bps to a range of 5.25%-5.50%, is the frontrunner in terms of the number of hikes in this cycle. This latest move marks the 11th rate increase out of the last 12 meetings. While Fed Chair Jerome Powell left room for further hikes, market sentiment indicates skepticism, with traders believing this could be the last rate hike of the current cycle.
New Zealand
Having reached a 14-year high in May with a cash rate of 5.5%, the Reserve Bank of New Zealand has kept rates steady since then. Many analysts speculate that this may mark the end of a 20-month hiking cycle, with expectations for the central bank to maintain rates throughout the remainder of 2023.
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Britain
The Bank of England recently raised its key interest rate by 25 bps to a 15-year peak of 5.25%. The central bank also warned that rates were likely to remain high for an extended period due to the long-lasting effects of strong inflation. British inflation, which reached a 41-year high of 11.1% last year, has decreased more slowly than in other major economies. However, in June, it dropped more than expected to 7.9%, allowing for a smaller hike this time.
Canada
The Bank of Canada raised rates by 25 bps on July 12, reaching a 22-year high of 5%. Although policymakers discussed the possibility of delaying the increase, they concluded that the risk of inflation rebounding was too great. Canada’s inflation rate decreased to 2.8% in June, but the central bank does not expect it to reach its 2% target until mid-2025.
Euro Zone
The European Central Bank (ECB) raised its deposit rate by 25 bps to 3.75% in July, marking its highest level since 2000. However, the bank removed any clear indication of further hikes from its policy statement, suggesting that another increase in September was not a certainty. Euro zone inflation has further declined, providing some comfort to the ECB as it considers ending its streak of interest rate hikes.
Australia
The Reserve Bank of Australia (RBA) kept interest rates unchanged at 4.1% for the second consecutive month, stating that previous rate hikes had been effective in cooling demand. However, the RBA also warned that additional tightening might be necessary to curb inflation. In its recent meeting, the RBA forecasted a slowdown in headline inflation to approximately 3.25% by the end of 2024, eventually returning to their target range of 2-3% by late 2025.
Norway
Norway’s core inflation reached a record 7% in June, indicating that the tightening cycle is not yet complete. The Norges Bank unexpectedly increased rates by 50 bps to a 15-year high of 3.75% in June. Another hike is anticipated at its upcoming meeting on August 17.
Sweden
Despite a 20% decline in house prices since March 2022, Sweden’s Riksbank is expected to continue raising rates. Inflation, which cooled to 6.4% in June, still exceeds the bank’s 2% target significantly. It is anticipated that a 25 bps hike to 4% will occur in September, following a similar move made in June.
Switzerland
Swiss inflation decreased to 1.6% in July, its lowest since early 2022. This decline brings inflation within the Swiss National Bank’s target range for the second consecutive month. As a result, investors are speculating whether the bank will deliver another rate hike in September. Since June of last year, the SNB has gradually increased rates from -0.75% to 1.75%.
Japan
The Bank of Japan, reputed as the world’s most dovish major central bank, maintained its interest rate target at -0.1% in July. However, it surprised markets by making its yield curve control policy more flexible. Although the central bank continued to cap the 10-year bond yield at 0.5%, it declared that the cap would serve as a reference rather than a strict limit. Furthermore, the bank signaled it would tolerate a rise up to 1%.
In conclusion, central banks worldwide are grappling with the decision of whether to continue raising interest rates or halt the hiking cycle. While significant progress has been made in cooling inflationary pressures, the delicate balance between tightening too soon or too late has implications for financial conditions, inflation, and economic growth. Financial markets eagerly await the next moves of central bankers as they maneuver through these challenging times.
